In finance and economics, the greater fool theory states that the price of an object is determined not by its intrinsic value, but rather by the local and relative demand of a specific consumer. In an inflated market, a consumer, despite having broader market knowledge might pay an inflated price because of their needs and the local related-market value. Another consumer relative to their needs and assessment of market value may deem the price excessive. Thus to one consumer the commodity has a greater value than to another making the former look like a fool to the latter.
In times of hyper-inflation and in remote regions the price of necessities is so exorbitant that relative to normal markets these prices may seem arbitrary. Yet the local cost of doing business relative to the price in these regions, as well as the necessity to feed and shelter one’s self in a hyper-inflationary crisis, justifies through profit or actual benefit the “foolish” price.
In real estate, the greater fool theory can drive investment through the expectation that prices always rise. A period of rising prices may cause lenders to underestimate the risk of default.
A Ponzi scheme is a form of investor fraud where earlier investors are paid from the money gained by more recent investors. In order to stay afloat Ponzi schemes rely on a continuous supply of greater fools who are willing to buy into the scheme. Although a share in such a scheme has no value whatsoever, so long as more greater fools buy into it, it can remain profitable for the investors involved.
In the stock market, the greater fool theory applies when many investors make a questionable investment, with the assumption that they will be able to sell it later to “a greater fool”. In other words, they buy something not because they believe that it is worth the price, but rather because they believe that they will be able to sell it to someone else at an even higher price. It is also called survivor investing. It is similar in concept to the Keynesian beauty contest principle of stock investing.
Art is another commodity in which speculation and privileged access drive prices, not intrinsic value. In November 2013, hedge fund manager Steven A. Cohen of SAC Capital was selling at auction artworks that he had only recently acquired through private transactions. Works included paintings by Gerhard Richter and Rudolf Stingel and a sculpture by Cy Twombly. They were expected to sell for up to $80 million. In reporting the sale, The New York Times noted that “Ever the trader, Mr. Cohen is also taking advantage of today’s active art market where new collectors will often pay far more for artworks than they are worth.”
Bitcoin and other forms of cryptocurrency have been characterized as examples of the greater fool theory. Numerous economists, including several Nobel laureates, have described cryptocurrency as having no intrinsic value whatsoever. 
- Economic bubble
- Tulip mania
- Beanie Babies
- Subjective theory of value
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- Vogel, Carol; Lattman, Peter (2013-10-30). “Steven A, Cohen to Sell Works at Sothebys and Christies”. The New York Times. Retrieved 2015-03-06.
- “…some of the observed behavior of investors has appeared to fit the ‘greater fool theory’ in that their valuations of Bitcoin seemed based on a belief in a continued upward trajectory.” Polasik, Michal; Piotrowska, Anna Iwona; Wisniewski, Tomasz Piotr; Kotkowski, Radoslaw and Lightfoot, Geoffrey (2015). Price Fluctuations and the Use of Bitcoin: An Empirical Inquiry. International Journal of Electronic Commerce, 20(1) pp. 9–49.
- “Anyone who bought Bitcoin in the last two months of 2017, when the price reached almost $20,000, has been played for a greater fool.” Andreas Andriano, ??? (2018). A Short History of Crypto Euphoria. Finance & Development, June 2018, pp. 20-21
- ‘In the conclusion, we discuss Bitcoin’s future and conclude that Bitcoin may change from a short-term profit investment to a more steady industry as we identify Bitcoin with the “greater fool theory,”…’ Merrick Wang, “Bitcoin and its impact on the economy”, 3 Oct 2020, Arvix.com
- Quiggin, John (16 April 2013). “The Bitcoin Bubble and a Bad Hypothesis”. The National Interest. Archived from the original on 22 October 2014.
- Shiller, Robert (1 March 2014). “In Search of a Stable Electronic Currency”. New York Times. Archived from the original on 24 October 2014.
- Costelloe, Kevin (November 29, 2017). “Bitcoin ‘Ought to Be Outlawed,’ Nobel Prize Winner Stiglitz Says”. Bloomberg. Archived from the original on 2018-06-12.
It doesn’t serve any socially useful function.
- Wolff-Mann, Ethan (April 27, 2018). “‘Only good for drug dealers’: More Nobel prize winners snub bitcoin”. Yahoo Finance. Archived from the original on 2018-06-12.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder and CEO of TBIL.co STATX Mutual Fund.